Power Hour: Bullish on Ethanol Growth

It's important to take a step back from the present day political fray to realize just how important ethanol has become to producer incomes.

Plenty of bears can be found on ethanol growth. Demand has peaked and with the 10% blend wall tough to break through and tumbling gasoline demand, ethanol demand—and corn use for the fuel—has essentially been reduced.

Still, many remain bullish on ethanol. One is Chad Hart, an Iowa State University ag economist. This year, he says, ethanol corn demand slipped to 4.7 billion bushels from 2011’s peak of 5 billion. Hart sees a rebound to 4.9 billion bushels for 2014, and new records in corn demand for ethanol of more than 5 billion bushels right around the corner, eclipsing 2011’s record.

What makes Hart so optimistic? "I believe we’ll break through the blend wall during the next two to three years." Specifically, he sees growth in both E15 and E85, en route to meeting higher mandates under fierce attack this year in Washington.

"Only about 20 stations sell E15, but I see that growing to well over 200,000 stations within two to three years," he says. In saying that, Hart firmly believes that present regulatory and market hurdles will be overcome, just like they had to be earlier with E10. Some of that involves rulemaking by EPA, another creating an incentive for stations to convert to new pumps so they can sell it.

Still, 200,000 stations would only be 1% to 2% of all gasoline stations, but it would be an important start for E15 use, he adds.

As for E85, the major hurdle is price. It doesn’t presently make economic sense for consumers to buy it because it costs more than unleaded gasoline, factoring in the 25% less energy that it has than E10. Thus, gas mileage drops. Because of that, owners of flex fuel vehicles aren’t buying it in great numbers. Hart sees that changing. "There have been episodes when E85 was cheaper than unleaded," he says. I think we will have more of those episodes." When that happens, he thinks E85 sales will mushroom. Some in the industry have become more optimistic for E85 growth, in fact, than E15.

Some of Hart’s economist colleagues disagree. One is Wallace Tyner, a Purdue University ag economist. He does not see either E15 or E85 advancing much. "While there is a little bit of E85, E15 is adding essentially nothing," Tyner says. He does not see the massive station conversions necessary for E15 to succeed in a major way. For E85 to make economic sense, it must be priced 22% less than gasoline, and Tyner believes that’s unlikely to happen in the short run.

Because of this, he believes that EPA will likely reduce the ethanol mandate moving forward to match the reduction in the 10% blend wall, given the decline in gasoline use. At present, that’s 13.3 billion gallons of ethanol, not the 13.8 billion gallon mandate for 2013, let alone the 14.4 billion gallon mandate for 2014 called for by the Renewable Fuels Standard (RFS). EPA has the authority to lower the mandates. For its part, the Energy Information Agency, part of the Department of Energy, projects a 6% increase in ethanol production in 2014 from this year’s levels, which obviously would represent a nice boost for corn demand.

EPA recently testified before Congress that higher blends of ethanol may be needed to meet increasing requirements or significant additional volumes of non-ethanol biofuels would be needed. "We will continue to look at the potential impacts of the blend wall over the near and longer term," EPA says. The agency will look at these issues as it sets ethanol requirements for 2014.

It’s important to take a step back from the present political fray to realize just how important ethanol has become to producer incomes. For 2012/13, USDA says in its July 11 World Agricultural Supply and Demand Estimates report (WASDE) that a total of 4.65 billion bushels of corn will be used for the fuel for 2012/13. That’s nearly a 2 billion bushel increase in just five years. For perspective, this growth alone is far greater than corn exports WASDE forecasts for 2013/14. "The present blend wall means that 27% of corn is used for ethanol," Tyner says. "That’s still a lot of corn."